Bundles and Communication: A Successful Concept

Bundles and Communication

A Succesfull Concept

Author: Eriksson, Jesper

Supervisor: Nordvall, Anna-Carin

Student

Umeå School of Business and Economics Autumn semester 2012

D E D I C A T I O N

I want to start with a big thank you to my supervisor Anna-Carin Nordvall who has with her knowledge and understanding helped me to stay on the right path during my research period. I also want to send my gratitude to Atlas Copco Secoroc AB and Leif Larsson for the chance to do my research for them. A big thank you to the people interviewed who have spared time for me, to answer my question and show me around at their workplace, office building and mine.

Finally I want to thank my beloved family for all the support and help I have received during this semester.

It is important to understand that without the help I have received this research would have been impossible to conduct.

2012-05-22

Jesper Eriksson

A B S T R A C T

This research has been done on a mission from Atlas Copco Secoroc AB, DTH department.

The focus and purpose of the study is to acknowledge the important factors you need to take advantage of when it comes to offering bundles. There is also a theoretical purpose, which is to investigate if communication together with bundles can create loyalty and, how this three factors affect each other. This is a somewhat overlooked research area within the bundles theory and is therefore of keen interest for this case.

The research has been conducted through seven in-depth interviews with people related to Atlas Copco Secoroc and the sell-buy transactions. The interviewed people were customers, sales persons, service technician, distributions co-ordinator and price department personnel.

There was also investigative quantitative research done, where nineteen customer centres were asked to reveal competitor’s customers net price on different products. The interviews could not have been conducted without a literature review done within the subjects of bundles, communication, loyalty and price strategies. These four topics together with how the order works and the contact between different instances worked as the base for the interviews.

The literature review plus learned information on Secoroc was the basis of the knowledge needed to conduct the interviews.

The key factors found in the research that Secoroc needs to take advantage of are communication within the company, and with the customer and also the importance of relationship building. This is something a majority of the interviewed persons believe is missing, or hard to have time for, and something that theory puts a lot of pressure on. Better communication will lead to easier sales, better relationships and through that, increased loyalty. It will facilitate the sales of bundles and the communication will help in the creation of bundles. The findings include a suggestion where the mission is to involve Secoroc deeper with their customers. The findings suggested that a reason for the missing contact is because lack of resources. Therefore the solution is to employee service technicians in high-loaded areas. Through that a more regular and close contact will be established. Customers can concentrate on the drilling and Atlas Copco Secoroc will take care of the administrative work.

Further research has to be done within subject of how to divide the invoice when more then

one product company is involved in the bundle. Connected to this is how the reward should

be divided between involved sales persons. A redevelopment of the system is needed and

therefore more knowledge and research over how that can be accomplished must be acquired.

I N D E X

1. Introduction  ...  1  

2. Problem Background  ...  4  

2.1 Purpose  ...  6  

3. Theoretical Method  ...  7  

3.1 Topic Choice and Preconceptions  ...  7  

3.2 Research Design and Strategy  ...  7  

3.2.1 Literature Review  ...  9  

4. Theory  ...  11  

4.1 Bundles  ...  11  

3.1.1 Types of Bundles  ...  17  

4.1.2 Development of Bundles  ...  18  

4.2 Price Strategies  ...  19  

4.2.1 Customer Value-based Pricing  ...  22  

4.2.2 Pricings Ethical Issues  ...  23  

4.2.3 Get Around Price Fixation  ...  24  

3.2.4 Effective Sales Force Management  ...  26  

4.3 Communication  ...  27  

4.4 Communication & Loyalty  ...  29  

4.5 Relationship Quality Model  ...  31  

5. Practical Method  ...  34  

5.1 Sample  ...  34  

5.2 Interviews  ...  36  

5.3 Questionnaire  ...  37  

5.4 Data Collection  ...  38  

5.5 Data Analyse  ...  39  

5.6 Validity and Reliability  ...  40  

6. Results & Analyses  ...  42  

6.1 Interview  ...  42  

6.1.1 Contact in Different Constellations & Communication  ...  42  

6.1.2 The Order  ...  44  

6.1.3 Products & Bundles  ...  46  

6.1.4 Communication & Loyalty  ...  48  

6.1.5 Price Strategies  ...  51  

7. Conclusion  ...  55  

7.1 Key Findings  ...  55  

8. Solution  ...  58  

8.1 Presentation of Solution  ...  58  

8.2 Solution Discussion  ...  59  

8.3 Limitations  ...  62  

8.4 Further Research  ...  63  

9. References  ...  64  

Appendix Index

Appendix 1 – Interview Guide, Customer..………...………65

Appendix 2 – Interview Guide, Customer Centre………...………..67

Appendix 3 – Interview Guide, Distribution Centre……….70

Appendix 4 – Interview Guide, Navetti……….…………...……….73

Appendix 5 – Competitor Price Investigation………75

1. INTRODUCTION

In this introductory chapter the text is going to lead you as a reader into the market, explain the product and industry, but also highlight the knowledge that is important to have

throughout the study.

Imagine a village located in a desolated landscape without any access to water. The closest water well is a 20-kilometer walk in one direction. This situation is sadly a reality and something that many people in the world have to live with today. With the creation of down- the-hole drill technique is it today possible to drill water wells closer to the village if the ground allows it and contains water. DTH today can help in several areas and one of them is water well drilling no matter if it is in Sweden, Kenya or Peru. The down-the-hole technique can also be used in open-pit mines or for the drilling for geothermal which is an environmental good way to extract energy. With this explained I can see the importance of a working and developing industry for DTH drilling tools and why they are so successful on the market.

Bundles can broadly be defined as the combination of two or more products and/or services in a single package for a special arranged price (Janiszewski, C. & Cunha JR.M, 2004, p. 534).

The individual products and/or services offered in a bundle may or may not be offered independently to their individual prices (Yadav, M.S., & Monroe, K.B, 1993, p. 350). There are several examples of situations in practice where bundles are used. For example, banks offer, lower-priced insurance, credit cards, and financial services when these products are purchased together. Resorts on the other hand offer lower-priced airfare, accommodations, and event tickets when you as a customer purchase them as a bundle. It often occurs in the fast food industry where the company develop ready meals to simplify the decision and give price discounts to the customers. Sellers are bundling products and/or services together in hope that the surplus of the attractive product will compensate for the less attractive products in the bundle. The idea of using bundles as a strategy for extracting customers surplus has lead to and increasing development of different methods that optimize the composition and pricing of bundles. (Janiszewski, C. & Cunha JR.M, 2004, p. 534)

The pricing strategy today used by Secoroc is based on transfer prices that every customer centre has. Today the transfer price is changed twice a year because of the fluctuating prices on raw material and is set by the product line managers and the chief of marketing. Additional to the transfer prices are products with similar characteristics within Secoroc’s assortment compounded into different rate groups; every rate group has their own rate factor. The rate factor consists of a three-number code with the ability to distinguish them from each other.

With help from the transfer price and the rate factor the customer centres can set the sell price, and no matter where in the world they are located will it be approximately equal depending on the situation for the local currency. The reason for this is to minimize the risk that buyers from nearby countries can buy from other customer centres or other buyers and get the products cheaper. This could for example be a risk when selling to Switzerland who has a stronger currency than their neighbour countries. The calculation for the local price is easy;

you start off with reference price in Swedish currency multiplied by the rate factor to get the

selling price in Swedish currency. (G. Boström, personal communication, 2 February. 2012)

To sell it in the international market you then take the reference price in Swedish currency divided by the exchange rate that is set every year by Secoroc to make it equal over a year.

(G. Boström, personal communication, 2 February. 2012)

The idea today is that the customers will go through the customer centres when ordering product, but there are special occasions when the order goes directly from buyer to the product company. An order from buyer directly to the product company is called an indent sale. Today the product companies doing the highest margin, and the customer centres are expected to generate 2-7 percentages of total sales as profit. This number varies between different regions but also depends on the economic situation. (G. Boström, personal communication, 2 February. 2012)

Drill meter contracts are very interesting for this study because there is a lot to learn and adapt from them when it comes to creating bundles. A drill meter contract is constructed, as the only expense for the customer is that they have to pay only for every meter, ton or kilogram that they drill and Atlas Copco stands for everything else. For example, this means that Secoroc for example are supplying the customer with tools, they sharpen the drill bits, and are responsible for that the gear is ready to use and is on location when needed. The work tasks that Secoroc are responsible for is different between contracts and mines but these are some examples of tasks that normally are involved in these type of contracts. Drill meter contracts are very value oriented and guarantee performance, service on the tool, supply and inventory management and lowering the cost. (I. Hadjiev, personal communication, 2 February. 2012) To be able to establish this type of contract Atlas Copco Secoroc have some demands that need to be fulfilled by the customer. They require a minimum turnover of 500 000 euro/per year, a contract duration of a minimum of 1-3 years because of the complexity and the ability to get a good return and 1-3 full time employed persons at the workplace from Atlas Copco.

Today there are two types of drill meter contracts. Standard supply contracts where the customer is paying by unit price or, value oriented where the customer is paying cost per measure (foot, ton, meter). The drill meter contract has several advantages but it also has disadvantages. Typically advantages are customer loyalty, reduced competition entrance possibility, continual improvement, monitoring of the performance, delivering value for the customer, and consistent product (scales) flow. On the other hand the disadvantages are economical risks, higher administration costs, required dedicated resources, large initial investment and larger volumes all adding to the pressures on the pricing. (I. Hadjiev, personal communication, 2 February. 2012

In the 1930’s down hole drills (DHD later DTH) were introduced to the market to drill deeper

holes. The main part of the development of this technique took place in Belgium and United

States. Atlas Copco in their turn designed a down-hole drill in the mid-thirties that was

successfully used in two Swedish limestone quarries until the 1950s. Atlas Copco re-entered

the market in 1969 with the COP 4 and COP 6 down the hole hammers which later where

followed by the COP 32, 42, 52 and 62 from 1978 onward. In the early 90’s, COP 44, 54 and

64 were introduced to the market and later came the introduction of a complete new model

with the COP Gold series in the beginning of the 2000’(s). The down-hole drill technology

had a rapid change in the 1960’s and 70’s, the largest development could be found in the drill

efficiency and that the life length of the products increased dramatically. (Atlas Copco, 2011,

p.7)

Today DTH drilling is the dominant method when it comes to the hole range between 100- 254 mm, especially when the hole depth is greater than 20 metres. The drilling technique works both for surface drilling and underground. A main feature of DTH drilling within this hole opening range is the excellent straightness within 1,5 percentage deviation. Other features with the DTH pipes are good hole opening cleaning, good quality on the holes, deep hole drilling capacity and efficient energy transmission. The DTH drilling works because the percussion mechanism (often called the hammer) is located behind the drill bit. The drill pipes then transmit the necessary feed force and rotation to the hammer and bit, and compressed air for the hammer and flushing of cuttings. The drill pipes are then added behind the hammer successively as you get deeper down in the ground. The piston strikes the impact surface of the bit directly, and at the same time the casing, giving the drill bit straight and stable guidance. With this system the energy remains constant and does not have to pass through any joints. (Atlas Copco, 2011)

Today the DTH drilling method is growing in popularity in all segments of the industry including blasthole, water well, foundation, oil & gas, cooling systems and drilling for heat exchange pumps. (Atlas Copco, 2011) The global metal and mining industry grew strongly during 2007 and 2008 but suffered a large decline in 2009 under the economic crises.

However did the growth rate did recover under 2010 and the five-year forecast shows an increase of the value of 140,6 percentage, and the volume forecast is an increase of 19,3 percentage. (Datamonitor, 2011, p.2)

This knowledge about the development of DTH drilling and the knowledge of the mining industry shows that this is an industry with a lot to gain in. Because of the increasing market and the oligopoly that occurs in the market it is important to use the strengths Secoroc have to make the barriers harder for competitors to steel customers and/or win new customers.

Picture 1 – Insight into how a Cop 44 Gold Hammer looks like inside.

2. PROBLEM BACKGROUND

In this chapter the text is going to highlight for the reader the background of the problem that created the purpose and research question for this study.

Secoroc is a division within Atlas Copco AB that has mining technique as their primary activity. You can in a wide product assortment find the “down-the-hole” pipes (DTH). These products are divided into three main categories; Pipes, Hammers and Bits but it also contains a big variety of other components, such as adapters, backhead, saversub etc. It is important to understand that the DTH-department has a complex and wide product catalogue that without the right experience and knowledge can be hard to read and understand. This creates a situation where customers can buy different parts of the DTH drill string from different suppliers to keep their expenses down. Today the DTH department is not offering any bundles with one single product number, instead the customers and customer centres are forced to order every single product number of the DTH pipe separately to get a complete drill string.

The closest you can get to bundles today is through the drill meter –and/or service contracts.

By offering bundles that facilitates the customers’ needs it will lower their costs. That is one of the missions from Secoroc’s side. Secoroc always strives to lower the cost for the customers without decreasing the quality and/or service. To create bundles would help with this problem. It would facilitate the orders and thereby be easier for customers to get their products on time. It also makes it easier for Secoroc to deliver them on time. There is also substandard communication within Atlas Copco in Örebro where the production of the drill rigs is located. This means that on a rig manufactured by Atlas Copco there can be drill bits or complete drill strings from competitors. The lack of efficient and working communication creates a wasted chance to sell a wider variety of the assortment of parts and through that increase the profit. Most importantly make it easier for the buyer.

Because of this situation Atlas Copco Secoroc AB started to look into a project where the mission is to sell a complete drill string from the rotation device and down to the drill bits. To be able to sell a complete drill string you have to understand how to maximize the customer value and how this will work together with customer centres (CC) and distribution centres (DC) both in the production country and the customer country. In the creation of bundles to make it cheaper and more efficient it is important that these two centres are able to perform the required tasks. It is therefore important to have the knowledge of what they can do and what is too much or to complex to perform. This research is going to look at bundles as something that triggers the purchase intention and builds loyalty in both directions, from customer to Secoroc and vice versa. The study will also investigate the pricing strategies for a specific subject as bundles and how Secoroc in the best way can use them to gain customer value and by that purchase intention and loyalty. Finally the research want to look at how Secoroc can use communication to achieve the connection between bundles and loyalty, and how through communicating bundles they can gain, as earlier mentioned purchase intention.

To sum up, everything in the end is about increasing the customer value. I together with Atlas

Copco Secoroc believe it is through making it more efficient, money saving and easier for the

customer through bundles. It will also create new ideas about how you can use the topic

bundles to conserve your business more time –and be cost effective for both Secoroc as a

production company and the customer as the buyer and user of the products.

Several studies in economy and marketing have looked at bundling but often in a B2C setting, which is in many ways very different in comparison to at B2B setting. Context within the industrial market are complex and processes regarding business-to-business requires a more thorough judgment. In a B2C environment the seller generally builds the bundle whereas the buyer in the B2B context creates it. The industrial markets are more complex because the purchase are often more significant then in a B2C context and requires a more careful assessment.   (Schoenherr & Mabert, 2008, p.82). In a B2B context there are fewer major customers. From a sellers perspective it is very important to make sure that the products meets the buyers´ need. Fewer customers have more power on the industrial market and geographical concentrations also are of stronger importance in a B2B context in comparison to a B2C context. A major difference between a B2C setting and a B2B setting is that the B2B setting is demand driven and the producer´s market is all in the hands of the consumers

market. (www.mig.se) B2B is a more complex context than B2C because both the buyer and the seller are experts within the area. From a sellers perspective this creates higher demands on the seller to be accurate and possess relevant knowledge and to build confidence-inspiring relations.

In the authors knowledge there is no pure research towards the B2B context within the

bundles theory and the seller´s decision to assemble the bundle process has not been looked at in the past. This study is aimed to put B2B market from a seller’s perspective into a new concept and tries to develop the bundles theories within a B2B sell, a special retail situation.

‘‘No research has been directed specifically at how sellers should present price information to buyers to promote bundled offers as well as the individual items that comprise the bundle’’

(Yadav & Monroe, 1993, p.350). Only a few studies has been conducted from the buyers perspective both when it comes to bundling as when its up to other related issues (Schoenherr

& Mabert, 2008, p.81).

In markets like Atlas Copco Secoroc AB it is important to gain knowledge about the factors that influence their buyers choice behaviour though their strategies for marketing depends upon this (Arora, R, 2008, p.481) and evaluations regarding variables of importance when it comes to decision making and purchase performance seems to be lacking in research today (Schoenherr & Mabert, 2008, p.81). Communication for example can have a large role when it comes to purchase intentions (Arora, R, 2008, p.475). Example of factors that can be of higher importance for B2B customers than B2C is; deliver security, maintenance and creation of relationships, expertise from the seller, guaranteed high quality products and focused target market. A factor that often is mentioned in bundles theory in the B2C context is the

expectation of savings when purchasing bundles, something that is not expected in the same

way in the B2B context. The most important factors in a B2C context is price whilst there are,

as earlier mentioned, many other factors that are more important in a B2B context.

2.1 PURPOSE

The purpose of this research is to investigate how the DTH-department in Atlas Copco Secoroc AB can provide superior customer value with their bundle deals. Further, the purpose is to investigate how through these bundles the DTH-department can achieve a more stable sales base and also change work methods to become more efficient.

The purpose of the research is also to contribute theoretical development ideas within the bundles theory. The theory that can be found today is primarily adaptable to the daily trade area and not always applicable to this research context. Within this research the purpose is to develop the bundle theory outside the daily trade area. The purpose is also to create a

cornerstone within the limited research area around communication as a loyalty-building tool within bundles and, enhance the understanding of how it works and in which areas that need further research.

From the purpose mentioned above the following research questions have been formulated;

- Create understanding for the important factors that Atlas Copco Secoroc AB need to take advantage of to become successful in the creation of bundles and customer value?

Investigating questions that support the research question;

- How can Atlas Copco Secoroc AB create bundles to facilitate their customers?

- How can Atlas Copco Secoroc AB increase the customer value through bundles?

- How can Atlas Copco Secoroc AB increase customer value through communication?

- How can Atlas Copco Secoroc AB increase the customer value through the choice

of price strategy?

3. THEORETICAL METHOD

This chapter is going to discuss the theoretical methods choices conducted in the study. This will include the choice of topic, preconceptions, research design and strategy and, the literature review. This chapter will help you as a reader understand the choices made in the

research.

3.1 TOPIC CHOICE AND PRECONCEPTIONS

My choice of topic was discussed together with my contact persons for the project on Secoroc and this was the topic Leif Larsson and me felt I would provide best insight to. The choice to apply and write for Atlas Copco Secoroc AB came under the fall semester 2011 when I decided I wanted to write about a company with a majority of their business abroad. This choice was made because Secoroc is active in a business context that really interests me and I wanted to do it for a company involved in the present well growing mining industry.

Leif Larsson and me discussed a diversity of research problems interesting for Secoroc and the research but ended up with the idea to look towards the possibility of offering bundles and investigate the important factors that you need to have knowledge about in a case such as that.

The choice of topic also fit the writers education very well after studying marketing on A, B and D-levels. It fits my interest of marketing that is more directed toward the industry business rather than the more obvious advertising agency industry. This gives me a good opportunity to broaden my knowledge and get a deeper understanding of how it works in real life.

There are few preconceptions from the author in this study because of the limited knowledge about the industry before the start. The preconceptions that can occur under the study from the author’s earlier experience and knowledge can be about the used theory and ideas for solution taken into the study. With courses in both A, C and D level in marketing it is therefore important to understand for the author that he can have a coloured view on some theories that he may think is better then others.

Therefore it is important to understand how preconceptions can affect the findings and how they are interpreted. The author understands that colleagues, participants and other contacts under the study time can affect him. This can create preconceptions for the result, interviews etcetera. The factors that can affect the results are acknowledged in this study. They have been developed from a neutral view and all factors whether they be a theory or a person have been treated as similar as possible.

3.2 RESEARCH DESIGN AND STRATEGY

A deductive research approach is when the investigation is to test hypothesized relationships derived from existing theories. From this hypothesize the researcher can later draw connections and make conclusions. (Shiu et al., 2009, p.278) Deduction takes the form that the scientist argue that if the theory is accurate X occur with some probability and can be predicted rather than it happening on chance. The predictions a scientist makes creates the hypothesis and can in most cases can be considered as an educated guess. The predictions lead to the study design and later show if the research produce results as predicted or fail.

(Goodwin, C.J, 2005, p.86)

An inductive research approach on the other hand is more about an investigating approach where you yourself collect and analyse primary data (Shiu et al., 2009, p.278). Induction is more of a logical reasoning process where you go from a specific event (the result of the experiment) to the general (a theory) (Goodwin, C.J, 2005, p.86). This is a more investigating approach where you want to go deeper and get a better understanding of the problem/s (Shiu et al., 2009, p.278).

The central key of hermeneutic is the understanding of the interpretations made to a specific text. The understanding of a text is through a process where the individual components’

meaning is determined by the text’s holistic sense. Key words are communication and text;

the interpretations prior knowledge will be of high value. The aim of the hermeneutic interpretation is to convey a common understanding of a text or interview. Hermeneutic is extra relevant when it comes to interview research. First looking at the dialog held between the interviewer and the person interviewed and second the process where the interview text gets interpreted. In an interview context it is the hermeneutic approach about listening to the several meanings that exists within the interviewer’s statement. Constantly be aware of the opportunities available to conduct new interpretations. (Kvale, S, 1997, p.42, 49, 126) In this research can a mixture between inductive –and deductive research approaches be find to be able to present a valid result that answers the research question. With limited knowledge and to make the investigating interviews as good as possible the use of theory research has been necessary. In the beginning a deductive research approach is used to get the basic knowledge about the theories used in this study but also as underlying material for the interviews. This approach has also been used to get the right product acknowledge for DTH- equipment which is of high importance to be able to conduct the interviews. So to specify it the deductive part of research has been the search for knowledge and literature to base the interviews and study on. The deductive research approach has helped me get the needed knowledge about several topics to be able to go through with the research and present a valid result. When the basic knowledge was achieved could the research move on to an inductive research approach. Because of the complex research question an inductive research approach was most suitable to delve deeper through interviews and really find the underlying factors to the problem. Through this approach the research could go from observation and findings to theories. From here then create a functional solution or guidelines that answer the research question. Together with the exploratory study, the inductive approach gives the opportunity to seek new insights, to ask questions and see the facts from another angle. So to specify it, the deductive part of the research has been interviews and the researching investigation over the prices worldwide. The research did not have any hypothesis instead was the interest to access the real data, understanding and investigating what the underlying factors behind the problems were. The main reason for the choice of an exploratory nature is because it gives the research an opportunity to clarify the problem and see the real reasons behind it.

The exploratory research can be done in three different ways. (Saunders et al., 2009, p.139- 140)

-A Search of the literature;

- Interviewing “experts” in the subject;

-Conducting focus group interviews;

The research have used two out of three methods where searched the literature and interviews with “experts” in the area where conducted. The choice to not perform focus group interviews was because of the complex situation of finding a good location and the time required to put all the relevant groups together for several hours that it would take to perform these types of interviews. I believe that it is too much to ask for both time for interviews and focus group interviews and therefore it is the decision to conduct literature research and expert-interviews.

An inductive approach is many times connected to qualitative research (Bryman & Bell, 2007, p.14). Qualitative research can be defined as of exploratory design to gain a preliminary insight into the problems and opportunities, to understand the factor that affects (Shiu et al., 2009, p.173). These cooperate on high level with the thoughts of how to collect the information needed to find solutions/theories. I have in this research conducted semi- structured deep interviews with experts in several different areas within Atlas Copco Secoroc AB and their affiliates. I also have in cooperation with Navetti conducted a quantitative questionnaire where Navetti and me want from the customer centres to know the price from both low-price and high-price competitors.

The choice to use both quantitative –and qualitative research method is to get a more complete picture of the problem area. These choices makes it possible to both get deeper with experts in different areas and get a broad view of how the prices are distributed for Atlas Copco Secoroc competitors. A wider range of information gives me the possibility to understand more how the bundles should be composed and also priced compared to their biggest competitors in the market.

3.2.1 LITERATURE REVIEW

The quantitative –and qualitative research method together with literature review has been the basis for this studies data collection. The choice to use both secondary –and primary data is because these two strategies will work in conjunction with each other and help to strengthen what’s true and show what is not consistent with each other. Reliability will get higher through this and will help to give a complete picture of the topic. The drawback on other hand can be overwhelming information and with that too much to take in. This could create a situation where not valid and uninsightful information will be brought up in the paper. This is a factor that I have been aware of and prevented it happening by being hard and fair towards literature by establishing boundaries during this research.

The knowledge in the subject is built through earlier experience from school, through secondary data and through the employees at Atlas Copco Secoroc AB. Reading secondary data such as articles, books and earlier work about this subject have contributed to a better understanding of the subject and helped me to be able to collect the primary data.

The secondary data is primarily searched through Umeå University library’s database (e.g.

main sources as Business source premier, and E-Journals, but also found literature in

databases as Academic Search Elite, EconLit, and Communication & Mass Media Complete)

but also received through google scholar. Google scholar has only worked as a tool to get

hold of articles found in the Umeå University database but that were for the moment not

available.

Google scholar as a database can be questioned and is acknowledged, therefore has it only been used to retrieve already found articles. I have mainly used articles from known papers and from writers known and accepted in their field of science. Examples of papers are Journal of Marketing and Harvard Business Review. In the phase of picking the right articles peer- reviewed has been a useful tool, peer-reviewed means how well they have been used and critically viewed from other writers. There has also been a choice of books where the choice is based on the writer and also if it is used as student literature.

A leader in the new research around price strategies connected to bundles is Andreas Hinterhuber. It is important to understand that a diversity of authors contributes to a better depth in the research. On other hand it is necessary that the information is contributing to the research and not just for the diversity of authors. The choice of Hinterhuber as the main source in the chapter about price strategies is for two reasons. (1) He is refereed back to in many research papers and (2) his research is most suitable for this case and research problem.

It is important to understand that in the choices of literature and most common in the article reviews is the lack of articles that combine the three areas that are decided to have in the theory. There are very few articles that treat bundles, loyalty & communication and pricing strategy together or for that sake just two out of these three main topics. If articles have been found are they placed in most cases in the general deal, which is not suitable for the context Atlas Copco Secoroc work in. Most research is done within general deals because the higher interest within that context. Some of the findings have been within the Secoroc context and some are exclusive for the daily general deal context. This has created a situation where I as a writer have read articles about different topics separately to later bring them together into something that can be used in the study and help in the reach for an answer to the research question. As earlier mentioned have I done it in this way because of the lack of research in the subject of how to build loyalty through bundles or how through effective communication to build bundles and pricing strategies that create bundles. There is a wide variety between the three main topics as theory and that can be an explanation for the lack of good and common research about them combined. The reason why these areas are picked in the literature review is because a connection can be found that can help to find a solution and that these areas need further research and investigation.

Commonly used words when searching for relevant articles and books have been; bundle, bundling, communication, loyalty, price strategies, customer-value based pricing and

relationship quality. The majority of these words have also been searched in combination with

B2B because that is Secoroc’s work field. Through out this strategy have I conducted a good

base for the study and ability to provide solutions and guidelines with backup.

4. THEORY

The upcoming chapter will provide you as the reader with the theoretical frames of references used in this study within the subject’s bundles, pricing strategies, communication and loyalty.

This will help in later stages to reconnect with the empirical study and also in the approach towards a solution/strategy or guidelines that will answer the research questions.

4.1 BUNDLES

The bundles theory today is mostly conducted towards the daily trade purchase and toward the individual customer. The area around bundles and the B2B section is a bit neglected and has not received the same focus from the researchers. Therefore, bundle theory used in this research may not be fully applicable to the specific context but is included to help understand what bundles are. The focus is also how the theory should be changed to fit the B2B context better and through that fulfil the theoretical purpose in the research.

Before the explanation of what bundles are and what earlier research has found has earlier research highlighted the importance of understanding that there exists two types of threads in the literature about bundles. One thread deals with bundles as a strategy adapted by the firms in a multi-firm environment and the other thread deals with bundling used as a profit maximizing technique for an isolate monopolist. (Eckalbar, J.C, 2010, p. 514) Neither of these threads are fully adaptable to the purpose of this study, therefore is a mixture of the most related parts in each being used.

Soman & Gourville (2001, p. 30) mentions that the usage of price bundling is widespread in the marketplace. Manufactures and retailers are on daily basis offering multiple products and/or multiple units to bundle prices (Soman, D. & Gourville, J.T, 2001, p. 30). A bundle for purposes in this research are going to be defined as any combination of products and/or services (Schoenherr & Mabert, 2006, p. 192; Janiszewski, C. & Cunha JR.M, 2004, p. 534) and can be ranged from just a few items up to 20 or 30. A company has even been able to combine 600 office product items to a single bundle (Schoenherr & Mabert, 2006, p. 199).

The bundles can contain products such as raw materials, product components or services such as transportation, repair or a combination of products and services. Bundling can occur for three different reasons. (1) One-time purchase, for example, production machinery. (2) Regularly purchased items such as raw material. (3) Both short and long-term contracts.

(Schoenherr & Mabert, 2006, p. 192) Bundles are used both in customer –and industrial markets and individual products that have been picked into a bundle may or may not be offered separately by their individual prices. (Yadav, M.S. & Monroe, K.B, 1993, p. 350).

Nalebuff (2004, p.161, 163, 183) mentions price discrimination, entry deterrence and creating

cost savings as reasons why you should offer bundles of products and/or services. The

perception you build up, as a company by offering package solutions at a discount is another

beneficial strength. To bundle products and/or services together leaves a very little

opportunity for a one-product firm to enter into the market. Here it is important to understand

that in a larger sense almost everything is a bundle. For example a car is a bundle of seats,

engine, steering wheel and so on. The reason for this is that companies often can integrate the

products together better then the customers can on their own.

Agarwal & Chatterjee (2003, p. 358) mentions that the creation of bundles highlights new challenges for the product/brand manager. They now need to think beyond a single package or a single service and visualize the market and see where packages of products and/or services can take place. Schoenherr & Mabert (2006, p. 201) are indicating that firms that are bundling items together often require more working hours and more challenging activities than selling the bundled items individually. Other factors that need to be taken into consideration when crafting a bundle are industry trends, economic, legal and political developments, and current supply and demand.

To open up the customer’s mind-set and to convince the customer of the benefits of bundling can sometimes be a tough task. When companies make bundles they have to define everything in black and white, which is something most buyers are not used to. They often want everything in a shade of grey and do not want to determine everything upfront. They would rather wait and see how things develop and adjust in the future. Research shows that in general bundling requires more overall thought, analysis and information search.

Nevertheless, the extra work that was needed to be able to create the bundles was often worth the time and effort as the total value received was higher than when the items where sold individually. Bundling leads to lower administrative costs and contributes to savings.

(Schoenherr & Mabert, 2006, p. 201) Harris & Blair (2006, p. 508) points out that bundles can sometimes lower the freedom of choice because of the “requirement” to be less costly.

Researcher have found that customers that were less sure of use were less likely to buy season tickets to a sports team because of the risk of wasting money on events they cannot attend.

This is backed up by Heeler et al (2007, p. 497) who mentions that price bundling can lead to decrease in the actual demand for an offered service. For example the consumption of season tickets, you often buy a bundle of tickets even if you know that you cannot attend every home game that you have access to. Estelami (1999, p.108) mentions that empirical evidence has showed that customers can under certain occasions find it difficult to evaluate the value of the bundles. That can occur because the customer’s judgment will become bias because of different reasons. An example of a reason that can affect the customer’s judgment is that the main focus will be on the first bundle item presented to them. The other items will then appear to be remaining components that slightly modify the original thought about the first item. Other factors that can affect the judgment are that consumers have higher preference for multiple price decrease rather than single price decrease and therefore do not evaluate the bundle correctly and the customer judgment can become bias.

Although all these reasons show why you should, and why you should not have bundles it is

important to treat them, as more than just mere marketing gimmicks. It is important to

understand and be able to offer guidelines for the implementation of bundling strategies and

by that understand how they should be used. (Yadav, M.S. & Monroe, K.B, 1993, p. 350)

A key conclusion from customers is that bundling typically benefits them through a discount

in transaction costs, which means a saving for the customer. However, a bundle offer does not

have to offer a discount for the customer, for example large packages can be priced more

expensively then a smaller package (Heeler et al., 2007, p. 492) and “complementary

bundles” do not involve savings (Heeler et al., 2007, p. 493). A complementary bundle is for

example a computer processor bundled together with monitor and a printer. The help a

complementary bundle offers the customer through fulfilling their needs and take away the

work task of tailor designing the product combination on their own are worth much.

The reduced cognitive effort required in the purchasing process creates a possibility for the seller to take a premium on his bundles because of the added value for the buyer. (Heeler et al., 2007, p. 493) Estelami (1999, p.108-112) emphasizes that a sellers ability to demand a surcharge in a bundle may be especially true when it comes to complementary bundles. That is also demonstrated in his research that complementary bundles do not always pass on some form of savings. The research also showed that buyers might be ready to pay extra for a bundle than if they buy the products individually because they are relying on the judgment of the seller in the ability to provide them with a working system.

Complementary bundles have in contrast to other forms of bundling the feature of offering a combination of products, designed to be working as a system. It is also showed in research that customers have a higher purchase intention, and reservation prices for complementary bundles than for non-complementary bundles. Yan & Bandyopadhyay (2011, p. 355) points out that the demand for one complementary goods creates demand for the other, from this the firm can gain marketing power through bundling and give the vendors optimal price. The perfect complement has to be consumed together with its complement, the higher the degree of complementarity the higher is the chance that a customer buys both products simultaneously. Agarwal & Chatterjee (2003, p. 359) points out that a key to successful bundling is to simplify customers life through a successful combination of products and/or services in the bundle.

Because most bundles on the market are priced less than when the components are priced individually customers believe that bundles typically involve a discount (Heeler et al., 2007, p. 493). Yadav & Monroe (1993, p. 351) holds true that when there is savings offered for the individual items and additional savings for the bundles it is showed that the discount information presented for the buyers can be of substantial character. Yan & Bandyopadhyay (2011, p. 355, 359) found in their research that when the complementarity between the products in a bundle is high a larger discount should be offered. They also point out that complementary bundling can minimize the customer costs from 18 percentages to 57 percentages depending on the number of items in the bundle. Research has showed that customers expect a 10 to 15 percentage savings in a bundle offer compared to same products unbundled (Heeler et al., 2007, p. 494, 496; Schoenherr & Mabert, 2006, p. 190). Heeler et al (2007, p. 494) means that this shows how influenced customers become by how the majority of the bundles are formed and that they expect that a bundled offer should lead to cost savings.

Results in studies has showed that 62.2 percent expect package discount, 13.4 percent think

that bundled offers reduces customers choice and 7.8 percent think that some bundle packages

should be included in the base model (Heeler et al., 2007, p. 494). 22.2 percent believe that it

helps to increase sales and that 20 percent think that service providers should provide some

encouragement for bundle purchase (Heeler et al., 2007, p. 496). Estelami (1999, p.109)

mentions that the larger the number of items in a bundle, the higher levels of savings the

customer achieves. Buyers who want to purchase large bundles will then pay lower per-unit

price (Estelami, H, 1999, p.109). This shows that the economic effects of price bundling

drives the psychological effects and enhances the customers pre-purchase evaluations of an

offer and increase the likelihood for a purchase of a bundle offer (Heeler et al., 2007, p. 493-

494).

Research about bundles has showed that pricing works as signals. The implication of this is that sellers may under certain occasions use the price bundling format to indicate a bundle saving without offering one. (Heeler et al., 2007, p. 497) Soman & Gourville (2001, p. 30) says that price bundling can decrease the price sensitivity and by that increase the purchase likelihood. Customers are more likely to demand less compensation for something that is purchased as a part of a bundle. Johnson et al (1999, p. 130, 132) emphasize that the price perceptions were lower and the repurchase intention higher when the price information towards buyers were partitioned. The explanation is that the customers often use heuristic processing when they evaluate a partitioned price.

Heuristic processing can either lead the customer to only focus on the price and adjusts their perceptions to account for the surcharge, or it can lead to ignore the entire surcharge for the bundle. (Johnson, M.D, et al., 1999, p. 130, 132) When talking about heuristics it generally means the use of shortcuts or rules of thumbs in making decision easier for people.

Availability heuristics is one such way in which the customer uses earlier experiences and what he remembers to make the purchase decision easier. (Galotti, K.M, 1999. p.440)

Lin & Huang (2011, p. 114, 117) emphasize that the regulatory focus theory says that buyers may perceive a loss when they encounter a bundle product because they may only need one of the products. The price framing can because of that evoke the feeling of perceived gain or loss for the buyer. The customers can respond to bundle pricing in two different ways, either through a promotion-focused system or a prevention-focused system. In the first one the customers look to maximize the gain of his/her purchase; in the second one the only thing customer wants is to reduce the loss as much as possible. When the firms are users of bundle pricing they should be aware of whether the framing is suitable depending on the different need levels the customer has. If a firm has prevention-focused customers who may need only one product, the firm stands a risk to lose profit if they use bundle prices that are lower than either the special or regular price on the wanted item. Therefore it is important to understand their customers. An example of that is to not offer bundles where the bundle price is lower than either the special or regular price for one product in the bundle when the customer is of prevention-focused character.

Soman & Gourville (2001, p. 31-33) says that in one unbundle transactions the costs and benefits are unambiguously linked to each other. On the other hand for bundled transactions the link between costs and benefits are open for interpretation, and could because of that result in a much weaker sunk cost effect. The sunk cost effect can be explained as the “greater tendency to continue an endeavour once an investment in money, time, or effort has been made”. Together with sunk cost it is argued that customers create a mental account upon when entering a transaction and closes the account when the transaction is completed.

Through the creation of a mental account customers keep a psychological link between costs and benefits on a specified transaction. If the product is consumed, as it should be the customer closes the mental account but if something goes wrong the customer will be forced to close the mental account without an offsetting benefit and will remember the cost of the transaction as a painful loss.

Schoenherr & Mabert (2006, p. 201) says that bundling products and/or services together

increases the leverage and bargaining power for the buyer’s. It increases the overall

attractiveness of the offered products in the bundle and reducing the purchase price in most

cases. Research has showed that the value received with a bundle would be smaller if the

Bundling products and/or services together can have a positive effect on the efficiency, because the fewer contracts and purchase orders that have to be handled can allow both parties to focus on more value-added tasks. The administration becomes more simplified and the complexity with a wide range of for example order numbers is decreased and it has showed that bundles create a more simplified purchasing environment by avoiding “cherry- picking”. Harris & Blair (2006, p. 510) found out in their research that the earlier in the shopping process the customer was exposed to the bundle the more likely it become that the bundle would be purchased. It would also lower the time consumed to make the purchase decision and by that make it more efficient for the buyer.

Janiszewski & Cunha (2004, p. 534-555) states that earlier models have assumed that in a bundle it is more important to put greater discount on the most attractive product in the bundle, that will reinforce the customer’s pre-purchase behaviour. Johnson et al (1999, p.

130) points out that other researchers have found that customers tend to connect more to the important item in the bundle and then adjust their evaluations of the complete bundle by taking in the less important items. Harris & Blair (2006, p. 507) mentions that a judgment issue that can occur when evaluating bundles is that the perceived value of an item is affected by another item in the bundle. Beside the affection from judgment issues the perceived value can be influenced by utilities or disutility’s created by the act of bundling. (Harris, J., & Blair, E.A, 2006, p. 507). That customers are more sensitive to the discount on the less important product in the bundles has been proven in earlier research. So, it is important to understand that customers subjectively value the individual items in a bundle before they sum up and evaluates the overall value of the bundle (Janiszewski, C. & Cunha JR.M, 2004, p. 538. 543).

Yadav & Monroe (1993, p. 351-352) mentions transaction value as an alternative view towards bundles and to understand how customers perceive the pricing. Transaction value is defined in the papers as the perceived savings (or “deal”) associated with buying the bundle.

It is stated that a higher reference price used when judging the lower sales price will lead to an increased perception about the deal and especially the transaction value. The perception of savings can be formed as a result of the comparison between what it takes to buy all the items separately with regular prices versus the amount it takes to buy them separately on sales.

Depending on the focus for the bundle the perception about the perceived transaction value can differ as a result of different ways of looking towards the bundle offer. First we can state that buyers may focus only on the additional savings that are offered to the customer directly on the bundle. Secondly the buyers may perceive savings on both the items and the additional savings and finally one can argue that the total transaction value is formed through comparison of the following information. First the amount that is needed to purchase the items separately to their regular prices and second the bundle price.

Of the three earlier discussed ways that buyers form their perceptions of savings, research has

showed proof for the second way as most likely. That is that the buyers perceive savings on

both the items and the additional savings. The bundles transaction value seems to have a large

influence from the additional savings offered on the bundle and savings offered on the

individual items is clearly of big importance. There is evidence that suggests that the lower

the savings are on one item the more important is the perceived saving on the other one

achieved for the customer. The pattern suggests that the buyers first see the savings offered

directly on the bundle and later notice the savings achieved on the individual items. (Yadav,

M.S. & Monroe, K.B, 1993, p. 355)

Rauyruen & Miller (2007, p. 25) mentions that the relationship quality model has a big impact on sales and loyalty, and therefore it is important to understand the impact it has on bundles.

The relationship quality model is consistent of four factors that create relationship quality that in turn creates purchase intention and attitudinal loyalty. ( Rauyruen, P. & Miller, K.E, 2007, p. 25) This model will be explained later in this paper to get a better understanding of it and also how important loyalty and communication are in the creation of bundles.

Yadav & Monroe (1993, p. 350) says that in the bundle research that has been done earlier can missing parts be found. There has been very little research and attention given to customer’s preferences for unbundled offers vs. bundled offers. Lin & Huang (2011, p. 117) mentions that in the present study a gap in the literature regarding how a customer’s goal can influence decision-making can be found. Further on Harris & Blair (2006, p. 506) point out that today relatively little research that examines the factors that drives customer preferences for bundles versus individual items can be achieved. Estelami (1999, p. 113) mentions that despite the increasing volume of research exploring bundles, there seems to be very limited research around the actual practice of bundling pricing. You can also see a gap in the bundles literature when it comes to the negative sides of it and what the drawbacks of bundling products are. This part of the research has been overlooked and that can be because of several reasons that I do not know or have not found evidence for.

Table 1: Top five mentioned benefits with bundling found in research done by Schoenherr &

Mabert (2006, p.200)

Table 2: Top five mentioned challenges with bundling found in research done by Schoenherr

& Mabert (2006, p.202)

4.1.1 TYPES OF BUNDLES

Estelami (1999, p.107) mentions that there is today two common approaches toward bundling. The first is pure bundling where the products can only be found in the bundle and are not offered individually. The second approach is mixed bundling where the items also can be purchased separately. Shankar et al (2009, p.96) argues that under these two approaches, four different hybrid offers emerge (bundles) can be defined that are shaped for different complexities and situations, so the company in the best possible way offers a superior bundle to the customer.

Flexible Bundle - This type of bundle is best suited for situations with complex products and services that are addressed for tricky customer problems. Characteristics for these situations are that the products and services are highly independent from each other (can be bought separately) but at the same time also highly complementary (combining the products and/or services can enhance the value).

A good example to explain the value both the company and the customer get out of this bundle is Oracle on Demand. They are mainly known for their packaged database software products but they are also offering consulting and management services to customize products so that customers can get the most value out of the product. The products and services that Oracle on Demand offers could survive on it’s own, but through putting them together as a hybrid boosted the demand 75 percent. This shows that the customers think it is more attractive with the items in the bundle together and for the company it is the benefit that Oracle on Demand will increase their profit. (Shankar et al., 2009, p.96)

Peace-of-mind bundle - Here the customer is looking to achieve a complete, best possible solution. Here the products and/or services are often low complementary and have a high independence but companies that can leverage them together in a strong mix can strongly differentiate itself from the competitors. For example elevator producers also offer the customers a service offer for the elevators. By combining high-quality products together with a premium service, the company differentiates itself from its competitors. Competitors are often strong in one of these areas but not both. The usage of peace-of-mind bundles can help you stand out in a commoditized market. (Shankar et al., 2009, p.96)

Multibenefit bundle - Here the products and/or services in a multi-benefit bundle are often of high complementary nature and almost inseparable. Because they are so hybrid it benefits the customers by offering them together. For example the cable-box connected to the TV, without the services is useless. Here the service is often really important for the bundle to be able to perform for both customer and company. A good example that highlights it is that in 2008 about 83 percent of TIVo’s revenue was derived from services. This shows how important the services can be like the modem is with stream, YouTube, download music, movie library and other attractive services. (Shankar et al., 2009, p.96)

One-stop bundle - This combination does not provide extra value in itself, instead does it attract customers through the reliability of the service and the convenience in the purchase.

The companies increase their sales by making the products and/or services available at the

point of sales. They rarely make the customer experience greater but they contribute to the

convenience for the customers. A good example to understand the importance of this is the

Regis Corporation, which is a hair care company.

They rarely perform a greatly improved experience for the customers but often increase the customer’s value through convenience and the recommendations from their stylist. The easy access because of the large number of stores also increases the achieved effort for the customers. (Shankar et al., 2009, p.96-97)

4.1.2 DEVELOPMENT OF BUNDLES

The development of bundles can often be a complex task where various combinations are potential. Agarwal & Chatterjee (2003, p. 360-361) points out several areas that should not be neglected in the creation of bundles. It is important to understand how the bundles are perceived from the customers. One thing that needs to be acknowledge is the fact that when the number of services increases in a bundle it gets more complicated for the customer to make a comparison between different bundles, which can lead to a lost sale. Estelami (1999, p.108) continues with saying that as the number of items in the bundle increases some of them can be perceived as optional or unnecessary for the average buyer. The risk when increasing the bundle size is to include items that will not be valued by the customer or not increase the bundle value. A strategy to counter this if you as a company really want to increase the bundle size is to become more aggressive when it comes to price strategy. Agarwal & Chatterjee (2003, p. 360-361) mentions that this also applies to the situation where the bundles are too similar to each other, for customers it is much easier to distinguish and value two dissimilar bundles. Similarity between bundles leads to comparison that takes more cognitive effort, when bundles do not share common features the comparison is on a more abstract level, which is much easier for the buyer. The similarity between two bundles can be defined by two factors, (1) how many components that are common between the different bundles and, (2) perceived similarity between the components across the bundle. Agarwal & Chatterjee (2003, p. 361) continue with saying that customers believe it is important that similar services are put together (e.g. lock system and alarm system). Participants in their study have expressed that it is easier if you can get everything on one bill, a natural good combination and if you can rely on one company it is much easier.

The developing phase of bundles are very tricky mainly because many different combinations can have potential but it is hard to see the one with the largest potential. When developing and evaluating different options should companies keep in mind these four rules that are going to be presented below. If the company follows these rules in their creation of bundles it is likely that right choices and better working bundles with high potential will be found rather than if you neglect these rules. (Shankar et al., 2009, p.97)

Rule 1 – Look for points of differentiation in product and service markets.

First you need to look at the different barriers to enter into your target market, some important questions to ask yourself and the company are; What is the degree of commoditization? Are the customer problems complex? and can the quality of the service be improved? (Shankar et al., 2009, p.97-99)

These questions help the company to get insight about the situation and how the bundles

should be created. For example if your products are highly commoditized can you enhance

the value by combining it with a high-quality service and vice versa. The second question

gives ideas that could be used to create hybrid solutions for complex problems, this both

creates hard times for competitors to imitate but also increases switching costs.